Paper currency not viable in Islam, says Maulana Sherani

Islamabad: Chairman Council of Islamic Ideology (CII) has said that an economic system based on paper currency is not viable, and that a system based on gold and silver should be considered.

He was speaking at a conference here, when he started the discussion for a return to the ‘gold standard’. Sherani said that before the advent of paper currency, the monetary transactions use to be conducted in gold and silver.

He said that this was necessary to establish a true Islamic economic system in an Islamic country such as Pakistan.

However, this has raised several questions about the current economic system in the country. The value of people’s wealth and deposits worth trillions of rupees is uncertain. The method of payment of foreign loans would also be uncertain. It is also undetermined how much gold is mined or imported within the country.

What is Gold Standard?

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.

Most nations abandoned the gold standard as the basis of their monetary systems at some point in the 20th century, although many hold substantial gold reserves.

The gold standard came to an end in the United Kingdom and the rest of the British Empire with the outbreak of World War I. The United States abandoned the system in the Great Depression during the 1930s.

Under the Bretton Woods international monetary agreement of 1944, the gold standard was maintained but could not be converted into currency domestically. The role of gold was severely constrained as other countries’ currencies were fixed in terms of the dollar.

The International Monetary Fund (IMF) was established to help with the exchange process and assist nations in maintaining fixed rates and help countries avoid deflation.

After the Second World War, a system described as a “gold exchange standard” was established under which many countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold at the official exchange. All currencies pegged to the dollar thereby had a fixed value in terms of gold.

During the era of French President Charles de Gaulle from 1959-1969, France reduced its dollar reserves exchanging them for gold at the official exchange rate which reduced US economic influence.

This, along with the strain of expenditures for the Vietnam War and persistent balance of payments deficits, led U.S. President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 commonly known as the ‘Nixon Shock’.